Real estate is one of the greatest wealth-building assets of all time, providing stable returns through all market cycles. However, investing in real estate through traditional means is becoming increasingly difficult.
The housing shortage has made it more difficult to find investment opportunities and surging home prices along with recent interest rate hikes have further limited the access to real estate investments.
While this may seem like a death blow to many investors' dreams of becoming real estate moguls, a growing number of retail investors are becoming landlords through a more affordable and efficient strategy: fractional real estate.
The real estate investment platform Arrived Homes, backed by Amazon.com Inc AMZN founder Jeff Bezos, is one of the fastest-growing providers of fractional real estate investments. The company offers securitized shares of income-producing single-family rentals through SEC-regulated offerings.
The company caught the attention of many high-profile investors during its seed round, attracting investments from Jeff Bezos through his Bezos Expeditions fund, Salesforce.com Inc CRM founder Marc Benioff through Time Ventures, former Zillow Group Inc Z CEO Spencer Rascoff and Uber Technologies Inc UBER CEO Dara Khosrowshahi.
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By utilizing Regulation A+, the platform can offer property ownership to non-accredited investors with investment amounts ranging from $100 to $10,000 per property.
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Real estate investors receive quarterly distributions from their share of the rental income and later realize gains through the price appreciation at the end of the target hold period.
One of the most overlooked benefits, however, is the tax advantages that come with owning equity in investment real estate. Since real estate depreciates, the actual cash distributions received each year are often more than the taxable income.
Fractional ownership isn't just limited to single-family rentals. Accredited investors are able to own shares of multi-million dollar commercial real estate assets and even major ground-up developments.
The real estate platform RealtyMogul has private equity offerings for commercial properties, like multifamily, industrial, office and self-storage, with minimum investments starting at $35,000. Annualized returns on realized investments through the platform have averaged about 17%.
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Fractional Real Estate vs REITs
Real estate investment trusts (REITs) have long been the popular option for passive investors to gain exposure to real estate, but this type of real estate investment is still vulnerable to stock market volatility.
For example, the leading single-family rental REIT Invitation Homes Inc’s INVH share price is down roughly 20% so far in 2022, while its real estate portfolio, rental revenue and funds from operations (FFO) have increased and its net debt has decreased.
Fractional real estate, on the other hand, has very little correlation with the stock market. This means that overall investment returns are typically more predictable and stable.
The lower volatility does come with a trade-off, however. Since shares of fractional rental properties aren’t traded on a stock exchange, liquidity options are typically more limited. There aren’t many options yet for secondary trading, whereas shares of a publicly traded REIT can normally be sold instantly during trading hours.
If one of your investment goals has been to start investing in real estate, you can now find available properties and become a landlord in minutes without having to get pre-approved for a mortgage or get into bidding wars with other home buyers.
Photo: courtesy of Arrived Homes
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